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Over the past week, sterling, bolstered by news of a 0.3%
expansion in Q1 and reduced chances of fresh BOE action before
Carney takes the reins in July, was the best performing major
currency. A short squeeze in the yen helped it almost match
sterling's 1.6% gain against the dollar.
Defying our expectations for more weakness, the Canadian dollar
was also among the top performers, helped by a rally in
crude oil. The 30- and 60-day correlation of returns
(percentage change) between WTI and the Canadian dollar is the
highest six months. Crude oil prices were higher six of the
past seven sessions.

Looking forward, the bad news is that the technical outlook has
been not clarified by the price action in recent days The
good news is that there are a number of key fundamental
developments in the coming days that will help strengthen or
crystallize the underlying trend. These events include the
euro area PMIs , the US employment data and the ECB and FOMC
meetings.
Our near-term bias is for a stronger euro, but the price action
itself has been poor. Technically, we think the euro has
put in the first leg of the correction of its nearly 10-cent sell
off from early February though early April. The first leg
up stalled near $1.32, just shy of the 50% retracement objective
(~$1.3230). We suspect there will be another leg up that
can extend the recovery toward $1.3350.
The fundamental basis for this is a shift in the news
stream. For the past few years, the euro area moves from
crisis to resolution to complacency. Since the (at least
temporary) resolution of the Cypriot crisis, Europe appears to
have moved into the complacency phase and this phase is often
supportive of the euro. At the same time we suspect the
market has gotten ahead of itself in terms of an ECB rate
cut. We suspect that if the market is not disappointed, a
sell-the-rumor, buy-the-fact, type of activity may be supportive
of the euro even if the ECB does cut the refi rate.
At the same time, the US news stream is poor. Most of the
regional Fed surveys and important economic data are being
reported weaker than expected. This weakness is seeing
discussions of a Fed exit, well, taper off. The
Dollar-Index, which is heavily weighted to the euro and
currencies that move in the euro's orbit (like the Swiss franc
and Swedish krona) is also looking heavy, finishing near its lows
for the week.
We have been talking about sterling's potential toward $1.56 for
several weeks. Although
it has been frustrating, the move above $1.5425 and the new
two-month highs seen before the weekend, boost credence in our
constructive sterling outlook.
We have argued that the dollar's advance from around JPY76 seen
in mid-November was the market pricing in the stimulative
monetary and fiscal policy associated the
Abenomics. The failure of the dollar to rise
above JPY100 has prompted a bout of long liquidation. The
greenback appears to be carving out a potential double top.
However, the neckline is not seen until the JPY95.80 low seen on
April 16. If confirmed, the measuring objective is near the
late Feb lows around JPY91. The 38.2% of the dollar's rally
since it became clear that Abe would be Japan's prime minister,
comes near JPY92.
Japanese markets are closed on Monday and Friday in the week
ahead. Japanese exporter and institutional investors have
been thought to be the featured yen buyers. While it may be
tempting to try to take the dollar higher without Japanese
resistance, we suspect that non-Japanese participants may be
reluctant to do so given the large short yen positions already
held by the short-term momentum and trend following market
segment.
The technical condition of the Canadian dollar improved as the
greenback was turned away from the CAD1.03 area. It now
looks set to test the CAD1.0080-CAD1.0100 area. A break of
this band would signal a return to parity. We note that the
Commitment of Traders points to a market that is very short the
Canadian dollar, though admitted the latest report does not pick
up the strength of the Canadian dollar seen in the second half of
last week.
Tame CPI figures got many players thinking the Reserve Bank of
Australia could cut rates at its May meeting and at least a 40%
chance of this has been discounted in the OIS market.
Since the sell-off from the near $1.06 level approached near the
middle of April, the Aussie has struggled to find much
traction The recovery in gold prices and copper prices,
both of which the Aussie's correlation with have increased in
recent weeks, may help support it, but it needs to resurface
above the $1.0320-40 area now to bolster confidence.
We also see that gold has retraced 68.2% of its recent plunge and
the momentum seems to have waned as the 20-day moving average has
been approached. .Copper prices bounced smartly off
18-month lows near $300, but reversed before the weekend from its
20-day moving average and a retracement objective. The
close was on the session lows.
The US dollar approached the cap we identified last week near MXN12.40.
The price action reinforces the significance of this area.
The dollar is will likely continue to be supported in front of
MXN12.00. We are concerned that the weaker series of US
data and softer Mexican data, coupled with a political scandal
that may sap some support for the PRI's reform efforts, may see
the peso trade in a broad range in the coming period.
Observations on the speculative positioning in the futures
market:

1. There were mostly minor position adjustments in the most
recent reporting week. Only the gross short yen positions
and gross long Australian dollar positions were adjusted by more
than 10k contracts. Gross long positions were generally
pared, with Canadian dollar the notable exception. Gross
short positions were also mostly reduced. The exceptions
were a small increase in the gross short euro position and gross
short Australian dollar position.

2. The reduction of more shorts than longs swung the net
Swiss franc position to the long side. This is the first
time that the net speculative position in the Swiss franc futures
has been long in two months.

3. The net short yen position is the smallest since early
March. The gross short yen position is the smallest since
late January.